Supply chain finance has to be important all the way up to the chief operating officer and chief financial officer level because the way a company brings a product to market is on average as important as the product that they bring. – Dan Hawthoff
What is Supply Chain Finance?
Supply chain finance (SCF) provides short-term credit to maximize cash flow for both the buyer and the seller of a product or service.
SCF seeks to:
- Supporting early payment of invoices
- Access to finance based on approval of invoice by buyer
- Provides low-cost finance for working capital needs
- Offer alternative sources of liquidity and predictable cash flows
SCF allows you to increase your credit terms while providing instant payment for your suppliers.
SCF is a strong and rapidly growing market providing an alternative source of funding for those facing difficulties obtaining traditional bank credit.
How does Supply Chain Financing work?
The corporate buyer enters into an arrangement with a financial institution, such as a bank, which will advance monies to a supplier on the strength of the invoices that it has issued. These invoices will have been approved for payment by the corporate.
When the invoice becomes due, the buyer pays the bank rather than the supplier.
The bank is able to make finance available to the supplier at a lower cost than it would usually provide. This is because the bank understands that it can rely on the buyer’s’ credit rating and is therefore exposed to a lower risk than is normal for regular finance.
Supply Chain Finance is similar to invoice discounting, however, the buyer is the one who initiates the finance arrangement with the bank, who then has reference to the buyer’s balance sheet. SCF is often referred to as Reverse Factoring because it is buyer led.
The reason to use Supply Chain Financing
Corporate buyers realize the importance of their suppliers and the value that their suppliers will bring them, more than the delivery of goods and the lowest cost achieved. These corporates are looking to their suppliers and creating close partnerships with them.
This provides faster payment for the supplier and creates supply chain security for the corporate.
